What is digital money?
Any means of payment existing only in electronic form. Digital money is not tangible like a dollar bill or a coin. It is accounted for and transferred using computers. The most successful and widely used form of digital money is Bitcoin cryptocurrency. Digital money is exchanged using technologies such as smartphones, credit cards and online cryptocurrency exchanges. In some cases, it can be transferred in physical cash, for example by withdrawing money from an ATM.
Key points to remember
- Digital money is a currency that exists only in digital form. It is not a tangible asset like silver or other commodities like gold or oil.
- Digital money can include, but is not limited to, cryptocurrencies. Most of the digital money held in the world belongs to banking institutions.
- Banks have been able to cut operating costs with digital money because they don’t have to pay rent on as many physical locations or keep paying for retail employees they don’t have need.
Understanding digital money
Digital money has been around since the Internet era. Several digital cash register companies were founded in the early 1990s, the oldest and best known of which is DigiCash. However, most of these early initiatives failed or declared bankruptcy quickly because electronic commerce had barely integrated into the Internet and few retailers accepted the first digital currencies. The advent of PayPal gave birth to the idea of easy-to-use digital financial transactions.
Financial services companies facilitate digital money transfers and facilitate online transactions between strangers over long distances. Without digital money, many online retail websites would operate much less efficiently. Digital money can also be used for banking online or via a smartphone, eliminating the need to use cash or visit a bank in person.
Banks have felt the impact of the accessibility of digital money and, in response, have closed branches and laid off many retail workers. This can be seen as a double-edged sword, because retail employees are no longer needed, the bank can reduce their cost structures because their overhead costs will be much lower. However, banks are unable to resell retail customers who come to their stores with items such as car loans, financial planning services and other in-person sales opportunities.
Examples of digital currency
The most common example of digital currency is money issued by banking institutions that they hold electronically, either for trading or for investing. Banks have liquidity requirements which mean that they must have a certain amount of physical money on hand, but there is no requirement for digital currency, so it moves much more. Most banking institutions have departments that process millions and sometimes billions, without ever seeing cash.
Another example of digital currency is cryptocurrency. “Crypto” is a kind of digital currency that exists within the blockchain network, a network that some consider to be safer than any other because there is no supervision from the financial authorities. Cryptocurrency is mined, exchanged or purchased and kept in digital “wallets” until the owner is ready to spend or use them. Common examples include Bitcoin, Ethereum, Litecoin and Ripple.